Having a brokerage account is one of the first things investors need in order to start investing. Here’s everything one needs to know about it.
In this article:
- What Is a Brokerage Account?
- Why Do Investors Need a Brokerage Account?
- What Is a Free Brokerage Account?
- What Is a Custodial Brokerage Account?
- Who Can Open a Custodial Brokerage Account?
- Where Should Investors Open a Brokerage Account?
- How Can an Investor Open a Brokerage Account?
Brokerage Account: What Is It and Why Is It Important?
What Is a Brokerage Account?
A brokerage account is a kind of investment account that investors open with brokerage firms (e.g., an online broker). Investors can deposit money in their brokerage accounts so that they can invest in financial securities through their brokerage firms.
Brokerage firms take investment orders from investors and execute those orders on their behalf. In return for doing so, brokerage firms charge commissions from investors.
A brokerage account can provide access to different financial securities such as:
- Index funds
- Mutual funds
- Exchange-traded funds, and derivatives
Many brokerage firms provide investors with access to sophisticated investments, like derivatives and foreign currencies, as well as simple investments.
Why Do Investors Need a Brokerage Account?
Without a brokerage account, investors will have a very hard time investing or liquidating their investments. Why?
Without a brokerage account, investors have no access to stock, bond, and other financial exchanges, where millions of investors converge. They have to personally look for others who transact the same securities at the same volumes and prices as theirs.
- An investor wants to buy 100 shares of Apple stocks at $100 each.
- Without a brokerage account, this investor will need to look for investors who are willing to sell the same number of Apple stocks at $100 each.
- With a brokerage account, this investor can access major financial exchanges where Apple’s stocks are actively traded. In those major financial exchanges, millions of buyers and sellers come together to transact, among others, Apple stocks.
With a brokerage account, investors can easily buy and sell financial securities. Without one, they’ll have a very difficult, if not impossible, time buying or selling financial securities.
What Is a Free Brokerage Account?
Successful investing requires maximizing returns on investments. However, each dollar investors pay in commissions and other transactions costs to brokerage firms can erode those returns.
To maximize investment returns, a free brokerage account may be ideal since it doesn’t charge commissions or any trading fees to investors.
Brokerage firms that offer such accounts allow investors to trade stocks, exchange-traded funds, and mutual funds for free.
However, cost-free transacting has its trade-offs. Some of them don’t allow IRAs and have very limited customer support and investment options.
But for neophyte investor, those looking for something simpler, or those who prefer traditional securities like stocks or bonds for investments, such trade-offs are very acceptable.
What Is a Custodial Brokerage Account?
Most brokerage firms prohibit minors from directly opening brokerage accounts. For investors who want their children to start investing young, they can choose custodial brokerage accounts.
A custodial brokerage account is one that adult investors can open on behalf of minors.
Who Can Open a Custodial Brokerage Account?
In most cases, parents open and hold their children’s custodial brokerage accounts. However, any adult can act as a custodial brokerage account’s custodian. Uncles, aunties, grandparents, brothers, sisters, or even family friends can open custodial brokerage accounts on behalf of minor children.
The most significant feature of custodial brokerage accounts is the fiduciary relationship created between minors and custodians. This relationship limits the custodians’ control over custodial brokerage accounts.
Custodians have complete authority to manage the assets in custodial brokerage accounts. Because brokerage firms accept investment instructions from them, custodians can execute trades in the same way as owners of non-custodial brokerage accounts do.
Where Should Investors Open a Brokerage Account?
Investors can best grow their wealth over the long term through a variety of financial securities, which they can easily access through brokerage accounts, which are offered by brokerage firms.
Choosing the wrong broker can substantially affect an investor’s long term investment returns. That’s why it’s important for investors to consider the following factors to help them choose the best brokerage firms.
- Lowest commission charges and few or no additional account maintenance fees
- Appropriate minimum investment requirement (i.e., amounts that investors can easily afford to put in their brokerage accounts)
- Wide variety of brokerage account types such as IRAs, regular brokerage accounts, and health savings accounts, among others
- Available investment research, which investors can use to make wise investment decisions using their brokerage accounts
- Other financial services, like interconnectivity with bank accounts for easier transfer of funds
How Can an Investor Open a Brokerage Account?
Investors should first decide on what kind of brokerage account they want to open. These include traditional brokerage accounts, cash accounts, and IRAs.
Once they’ve decided what kind of brokerage account to open, they fill out an account application form. Many brokerage firms have online platforms, on which investors can apply for a new account.
They need to submit some identification documents, like a driver’s license and Social Security number. If investors want to enjoy more advanced benefits like margins and options trading, they need to submit additional information.
After brokerage firms approve their application, an investor has to fund their newly opened accounts. Brokerage firms provide several funding options, which include:
- Electronic Fund transfer — Transferring funds directly from their regular bank accounts
- Wire transfers — The fastest way to fund a newly opened brokerage account; Because wire transfers directly transfer funds from one bank to another, investors can fund their new accounts within minutes.
- Check payments — The acceptability and fund availabilities of which vary between brokerage firms
- Transfer of assets — Such as transferring existing investments from a current brokerage firm to a new one; Investors can also transfer assets to a newly opened brokerage account by rolling over their 401(k) to the brokerage firm.
- Depositing of stock certificates — Such as actual paper stock certificates
Brokerage accounts are important because they allow investors to conveniently invest in a wide range of financial securities. Hence, it’s important that investors, especially self-directed IRA owners, to open their own brokerage accounts.
Do you already have a brokerage account? If not, what’s keeping you from opening one? Let us know in the comments section below.
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